Traversing the Legal Tightrope

Editor's Note: This story originally appeared in the January issue of DS News, out now. 

As the final months of 2018 rolled around, housing demand remained high, while there were signs that inventory volumes might be on the upswing in some markets. On the default side of things, the low-volume environment continued as well: Black Knight reported that serious delinquencies hit a 12-year low in October 2018, falling by 14,000 from September and dropping by 90,000 year-over-year. Low, it seems, has become the new status quo, and it’s anyone’s guess as to when that will change.

For default servicers and their partner law firms and vendors, thriving in 2019 will require applying the lessons of 2018 and continuing to evaluate how best to navigate a housing landscape that looks very different than it did a decade ago. “We often hear that there’s going to be another bubble,” said Andrea Tromberg, Owner, Tromberg Law Group. “However, we have been very consistent in volume for the last couple of years, so I don’t see that changing, I believe we’re in a new norm.”

THE NEW NORMAL

“Servicers are scrambling to find loans,” said John Ansell, Partner, Rosenberg and Associates. “Investors are looking for loans. And the law firms are now chasing a smaller pool of files. Everyone is scrambling to keep their seat in the game of musical chairs.” Ansell told DS News that he anticipates that foreclosure volumes will inevitably rise again, even if only to “revert to the mean.” Meanwhile, 2019 will likely see interest rates continue to rise alongside home prices, as will rental prices as housing supply struggles to keep up with demand and affordability remains a challenge for many. “All those factors combined will probably indicate a higher volume going forward,” Ansell said.

This past year saw another spate of natural disasters, from Hurricane Michael’s October impact on the southeastern United States to the massive rash of wildfires that set swaths of California ablaze. The industry once again worked to assist affected homeowners, building upon the lessons learned in 2017 and before. Amber Todd, VP of Default Oversight, RoundPoint Mortgage Servicing Corporation, told DS News that “default servicing felt these impacts both before these unfortunate disasters, while establishing a successful proactive approach, and after, when assisting our customers in their time of need, ensuring proper foreclosure moratoriums were in place and conducting the necessary inspections.” The past year also saw no shortage of important legal and regulatory developments, ranging from nationally relevant shifts down to state-level changes and cases that could send ripples out through the industry.

Todd singled out the challenges servicers faced related to Bureau of Consumer Financial Protection requirements that require periodic billing statements for customers in active bankruptcy status. “It is vital that the servicing system platform be as accurate as possible, reflecting accurate pre- and post-petition debts,” Todd said. “We also had the revival of the Protecting Tenants at Foreclosure Act (PTFA) this year, which offers protections to bona fide tenants before proceeding with any eviction activity.”

Initially introduced in 2009, the PTFA contained protections intended to ensure that tenants facing eviction from a foreclosed property would have adequate time to find alternative housing. The PTFA expired on December 31, 2014, but President Trump’s signing of the Economic Growth, Regulatory Relief, and Consumer Protection Act last year also resurrected the PTFA. Speaking to DS News last May, Richard M. Nielson, Managing Shareholder, Reimer Law Co., explained that the return of the PTFA could significantly increase the amount of time it takes to complete a post-foreclosure eviction. If that range was between 10–30 days before, for example, the reintroduced law could now require as much as 90 days’ notice to “bona fide” tenants before they can be evicted. “It substantially increases the burden on mortgage servicers to comply with all the rules,” Nielson said.

LESSONS LEARNED

With volumes remaining low and significant changes happening at the government level, what were the biggest takeaways from 2018 that the industry should carry into the new year?DS News asked a cross-section of industry professionals about what it takes to succeed in an evolving default landscape. “As the country continues to see record low volume, the concept of ‘sustainable’ downsizing has been an important lesson,” said Roy Diaz, Chair of the Legal League 100 and Managing Shareholder of Florida-based SHD Legal. What worked in the height of the crisis won’t work when you’re dealing with historically low foreclosure volumes, and that impacts everything from how you do business to how to manage staffing levels. “Mortgage default volumes will likely never return to the kinds of numbers we saw several years ago,” said Christianna Kersey, Compliance Attorney, Cohn, Goldberg & Deutsch. “Firms need to be more streamlined and efficient in order to provide the level of service clients expect.” Compliance remains a primary challenge for both default servicers and their partner firms.

When there are fewer files to deal with, and workforces are often scaled back to accommodate that, it becomes all the more important to ensure that every i is dotted and every t crossed. “Over the past 10 years, our firm has devoted many resources to ensuring compliance with the law, client requirements, and best industry practices,” said Adam E. Codilis, President, Codilis & Associates, P.C.

“Continued reports of security breaches and industry regulatory actions in the past year have reinforced the value of this investment and a commitment to compliance and security.” “It’s about continuing to educate yourself on how those rules work in connection with our court system,” Tromberg said. She explained that the confusion regarding the ever-evolving web of rules and regulations can cause confusion not just for servicers and attorneys, but even for the courts. “That confusion is complicating issues and giving rise to defenses that would not otherwise exist,” Tromberg said.

Legal League head Roy Diaz also cautioned that the court system itself is also changing in response to the lower foreclosure volumes. “Where the courts previously utilized ‘foreclosure divisions’ to manage volume, those divisions are now being dismantled,” Diaz told DS News. “New judges are being appointed, many of whom have never tried or heard a foreclosure action. Cases and issues that seem simple and straightforward to those of us in the industry are foreign to some of the new judges, creating possibly more error in the court system and more appeals.”

Tromberg explained that she has also seen servicers and attorneys facing issues arising from a lack of due diligence on past foreclosures efforts, problems which then resurface should another foreclosure attempt be initiated on down the line. “We see cases where modifications were not properly recorded or properly transferred from servicer to servicer. Or perhaps they were properly implemented, but the paperwork isn’t there to establish what happened.” This gives opposing counsel more ammunition when it comes to making their case before the courts. Tromberg emphasized that vigilance and attention to detail can mean the difference between success and severe headaches. “There’s a big push in the industry to not spend money on things like title reports, but that can result in insufficient reports.

If we don’t put our best resources toward these things, it’s going to cost the borrower in the long run anyway, because we’re not going to have what we need to foreclose properly.” This level of diligence, Tromberg said, is especially important in cases where there have been multiple defaults in the past. “It’s difficult to proceed on a new case if you don’t know the terms of the last one.” “Stay focused on the work in front of you, and keep a sharp eye on the future,” said Robyn Padgett, Chief Development Officer for Padgett Law Group’s Atlanta, Georgia office. “Making the time for strategic planning takes discipline, but without the ability to see the forest through the trees, you can lose sight of potential development opportunities and efficiency gains.”

THE TWO C’S

Whether it’s interacting with borrowers, the court system, or government agencies such as the BCFP, the partnership between servicers and financial services attorneys can only thrive if the Two C’s are properly maintained: communication and collaboration. The latter can’t happen effectively without the former; the former will inevitably be strengthened by the latter. Of course, figuring out the best ways to keep those Two C’s attended to is the billion dollar question, and one that requires an ongoing commitment to regular and honest critical examination. “Every loan is different and unique,” Ansell said. “There are unique challenges in every jurisdiction around the country. Having those lines of communication open for all parties minimizes the amount of delay that unique issues will create.”

Neil Sherman, Managing Partner, Schneiderman & Sherman, suggests that the current low-default environment may have actually hurt the level of communication between servicers and their partner firms. “The lines of communication within the industry haven’t needed to be as direct as they were when we were in the Great Recession,” Sherman said. “We need to rebuild those channels and make sure that they are sound and in good shape across the entire industry, from technology vendors to legal professionals to the servicers to the investors.”

Robert Forster, Managing Partner, BDF Law Group, stresses that this ongoing communication between servicers and attorneys needs to be about more than just the daily exchange of necessary information. “I am talking about comprehending and understanding each other’s objectives,” Forster explained. “If you are fortunate enough to accomplish this, it not only makes working for that client more enjoyable, it also equates to greater efficiency and results.” Managing attorneys, in particular, needed to be involved in all significant communications with their servicer clients, according to Richard Solomon, Managing Attorney for Cohn, Goldberg & Deutsch. “Clients hire law firms not only to provide the routine, day-to-day processing actions required for foreclosures or other mortgage-default actions but also to provide legal advice.” He added that firms should be proactive in communicating with clients when they see relevant issues on the horizon, rather than waiting for clients to solicit that advice.

The good news is, the current low-volume environment can afford industry professionals a chance to reexamine both internal procedures and the ways in which they communicate with their partners. “We can take advantage of times when volumes are down to do an in-depth analysis to see where the process is slowing down or creating choke points, and then attacking those issues systematically,” Ansell explained. Ironically, sometimes the tools designed to help grease the wheels of communication and collaboration can have unexpected or even adverse effects. Diaz emphasized the importance of the “personal touch” when it comes to servicer attorney relationships, something that may sometimes be limited or lost in an era when technology has enabled what Diaz calls “portal relationships”—filtering interactions, more and more, through layers of digital intermediaries.

“While the efficiency that comes with case management portals is a valuable asset to all parties involved in the default space, knowing when to move beyond those systems and communicate directly is critically important,” Diaz said. “The goal should be to allow the portals to support the relationship but not to be the primary driver.” “Communication is successful only when both sides understand the information and work together toward resolutions,” said Eric Deighton, Attorney, Carlisle Law.

“It is important that servicers train employees to understand the significance of the legal process.” He further emphasized the critical nature of flexibility when it comes to servicers’ processes and procedures so that law firms can more ably help them comply with new and evolving regulatory demands. When it comes to navigating the treacherous waters of compliance management, communication between law firms and attorneys can be the sonar that keeps your ship from running aground. But the challenges involved are many, and they often come down to the practical realities of how difficult it can be to standardize processes and paperwork between multiple organizations, all working with their own philosophies and priorities.

A GAME PLAN FOR 2019

With a new year stretched out ahead of us, what should the industry expect from 2019? BDF Law Group’s Forster suggests that state regulators will be taking a more active role after 2018’s changes to Dodd-Frank and the evolving state of the BCFP under newly minted Director Kathy Kraninger. Forster explained, “It has become increasingly obvious that the states are taking a more assertive role in the regulation of the financial industry, so the slack the federal government provided the industry is simply shifting to state regulators.” One subject that’s been in the headlines and on the lips of the entire industry is the Supreme Court case Obduskey v. McCarthy & Holthus, LLP.

The Legal League 100 filed an amicus curiae brief this past November in support of McCarthy & Holthus in the case. The brief contended that law firms acting on behalf of their mortgage servicer clients by completing the non-judicial foreclosure process in states where permitted are not subject to regulation under the Fair Debt Collection Practices Act (FDCPA). The brief noted that such servicers are not collecting a debt as defined under the plain language of the statute. “The Legal League 100 stands committed to serving mortgage servicing professionals and all of our industry partners,” Diaz said.

Commenting on the amicus brief, Michelle Garcia Gilbert, Legal League 100 Advisory Council Vice Chair and counsel of record, said, “Application of the FDCPA to nonjudicial foreclosures is an issue that has a significant effect on the foreclosure process in states from coast to coast. We appreciate the opportunity to contribute and applaud the Court for taking up this important issue.” Subjecting law firms engaged in non-judicial foreclosures to liability paves way for opportunistic debtors’ attorneys to file lawsuits alleging violations in states where foreclosure laws are in conflict with the FDCPA, the brief contends. Matt Podmenik, Managing Partner for the Southwest, McCarthy & Holthus, told DS News, “The narrow issue before the court is whether or not the FDCPA is applicable to non-judicial foreclosures. One of the distinctions between a judicial and non-judicial foreclosure is the possibility of a deficiency judgment. In Colorado, a deficiency judgment is not possible in the non-judicial foreclosure.

Arguably, if a plaintiff did not request a deficiency judgment in a judicial foreclosure, some of the arguments we made would be equally applicable to judicial foreclosures.” Podmenik added, “It would be helpful to the industry if the decision was broad enough to apply to all foreclosures, but it is hard to predict whether the court will expand on the narrow issue in front of it.” In support of the respondent, McCarthy & Holthus, the Legal League 100 brief argued that finding in favor of the plaintiff would be likely to encourage mortgage servicers to proceed with judicial foreclosures in states where permitted. This would, in turn, result in a significant increase of the time and costs associated with a foreclosure, and the borrower would eventually bear the cost per the terms of most deeds of trust and state law.

The brief also stated the possibility of states with carefully crafted foreclosure laws designed to protect borrowers and lenders being compelled to rewrite their laws in order to comply with the FDCPA. BDF’s Forster also believes that it will be interesting to see how regulators react to the increasing role played by non-bank servicers, which hold “over half the nation’s mortgages within their portfolios.” As Forster points out, “traditional banks have always been subject to more regulation in the past. With inflation, rising interest rates, what appears to be a cooling housing market, and all-time low default rates, there’s no telling what’s next.”

Deighton explained that the default servicing industry will continue to be challenged by the regulatory reporting requirements imposed upon it, and will, therefore, need to monitor and ensure compliance with all required reporting obligations carefully. He also cautioned servicers not to focus on the national perspective at the expense of the local one. “With local elections, the personnel and policies of many municipal governments may change. Servicers may be subject to more regulatory burdens, such as foreclosure notification filing fees, vacant property registration/notification requirements and fees, point-of-sale inspections, and bonding requirements upon the filing of a foreclosure action,” Deighton said.

The new year also means a new Democratic majority in the House of Representatives, as well as a new Chair of the powerful House Financial Services Committee. Many speculate that Rep. Maxine Waters (D-California) is a likely candidate for the position, and her philosophy toward industry regulation is very different from that of her Republican predecessor. During an interview with The Financial Times after the midterm elections, Waters said, “It is critical to bring accountability to the current administration and the regulatory agencies under the committee’s jurisdiction.” “We will have to wait and see if they deliver on the agenda aimed at halting the purported deregulation of the banking industry,” Forster said. “What that means exactly, no one knows, but it certainly will have an impact on all facets of the mortgage industry.”

Whether 2019 will see any significant economic downturns remains to be seen, but Sherman told DS News that there are already signs that the status quo can’t maintain itself indefinitely. “We are starting to see some cracks in the wall already,” Sherman said. “We’re starting to see more bankruptcy filings. People smarter than me are anticipating a change.” When that change will happen, and in what form, is in some ways incidental to the fact that the industry should be prepared to pivot to tackle whatever challenges come at it, whether in 2019 or beyond. “In 2006, neither the servicing community nor the legal professional community were ready for what was coming—on any level,” Sherman said. “The goal shouldn’t be waiting until the brakes don’t work on the car anymore. You need to get things ready before your brake pads are worn down.”